Dent, Toomey slam medical device tax

Republican lawmakers meet with industry reps, who say levy would be devastating.

March 23, 2011|By Colby Itkowitz, CALL WASHINGTON BUREAU

A 90-year-old local manufacturer that fits war veterans with prosthetics could close if a new federal tax on medical device manufacturers is enforced.

"Basically, if the tax goes through we will turn out the lights, lock the doors and go home and not be able to service patients anymore," said Chris Field, chief financial officer of BOAS Surgical, which manufactures pedorthic, orthotic and prosthetic devices and has a branch in Allentown.

To help offset the cost of reforms, last year's health care law includes an excise tax of 2.3 percent on sales of most medical devices beginning in 2013. It is expected to raise $20 billion over 10 years. Advocates for the tax said businesses would benefit from millions of new government-insured customers and should help pay for the reforms.

Field says his small business, which employs 45 people, would be crushed by the tax. Large corporations like B. Braun Medical Inc. in Bethlehem say the tax would stunt growth.

Bruce Heugel, chief financial officer at B. Braun, said the tax would cost his business $24 million. He said an Ernst & Young survey shows the medical device industry makes a profit of 3.4 percent on sales. A tax of 2.3 percent would consume more than 65 percent of the industry's profits, Heugel said.

Big device makers have lobbied forcefully against the new tax. B. Braun does not employ its own lobbyist, but is a member of the Medical Device Manufacturers Association, a trade organization representing device makers in Washington, D.C. The group spent $360,000 in 2010 on lobbying, mostly against the tax.

Jan Wald, a medical device analyst at Morgan Keegan, said the tax will not devastate the industry but will crimp innovation.

"It's not going to kill it, but it is going to potentially damage it and I think the issue there is, the device industry has maintained itself and been able to grow at a nice rate primarily because of the ability to innovate," Wald said in a phone interview. "To the extent that there is less research and development …I think that's the danger."

Republican lawmakers U.S. Rep. Charlie Dent and U.S. Sen. Pat Toomey held a joint event at B. Braun on Wednesday, the one-year anniversary of the health care law, to decry the tax. Afterward Dent spent an hour speaking with industry representatives about the tax's impact. Other local companies that would be affected by the tax, OraSure Technologies and Olympus America, did not participate.

"Only in Washington could people say we are going to lower health care costs by adding to the cost of all the things we have in hospitals and doctors' offices," Dent said. Dent received $12,850 in individual contributions from B. Braun in 2010, according to OpenSecrets.org.

Some lawmakers in Congress, including Dent, have offered legislation to repeal the tax. Toomey said he expects the Senate to vote, but likely not pass, a repeal attempt.

It's unclear where U.S. Sen. Bob Casey, D-Pa. stands on the tax. Spokesman Larry Smar said his boss believes there "are a number of ways in which the law can be changed" and wants to continue examining and debating the issues.

The tax was championed by U.S. Sen. Max Baucus, D-Mont., who wrote the Senate version of the health care bill. He said hospitals, insurance companies, the pharmaceutical industry and medical device makers would benefit under it.

Toomey said start-ups in the state are too small to be profitable and will not survive the additional levy. "We've got a tax that on every level I can think of is going to harm an incredibly important industry in Pennsylvania," he said.

Robert Loiterman, president and CEO of GrantAdler Corporation, a small start-up in Allentown that makes implants for vascular access, said the tax would make it difficult to keep his business going because he needs a positive cash flow to qualify for working capital.

"This tax is not so much a tax on my profit; my company is just starting revenue … it's in addition to my losses while I ramp my sales to hopefully get to break even," Loiterman said.

Most medical device companies are small. Brendan Benner, spokesman for the industry's trade association, said 80 percent have fewer than 50 employees. "These are by no means giant corporation entities that can easily absorb this tax," he said.